Introduction
Continuing the trend of innovation through DeFi, Dynamic Liquidity expands upon concentrated liquidity concepts, with Meteora leading the way.
Dynamic Liquidity Market Makers (DLMMs) enable us to set both the upper and lower limits of our ranges and actively manage the distribution of liquidity within those bounds. This capability contrasts with Concentrated Liquidity Market Makers (CLMMs), which distribute liquidity evenly across the range.
Before proceeding, it is essential to understand the basics of CLMMs. For more information, refer to this complementary article.
How Does It Work?
Image taken from Meteora Docs
This functionality is achieved by creating smaller sub-ranges known as ‘bins’, allowing you to allocate capital differently across each bin. Consider each bin as an individual concentrated liquidity range. On platforms like Orca, managing multiple bins would require separate positions for each range. However, Meteora enables managing this from a single position.
Using the SOLUSDC pool example depicted above, observe that the majority of the liquidity is concentrated in the middle of the range.
Bins above the current price only contain SOL, which is logical because if the price rises, SOL is needed to sell to buyers; there’s no benefit to having USDC in these bins.
Conversely, bins below the current price exclusively hold USDC, positioned to purchase SOL during a price dip. The bin containing the current price will fluctuate its holdings similarly to a single Concentrated Liquidity Market Maker (CLMM) pool.
You can adjust the width of each individual bin, known as the bin step. A smaller bin step results in tighter sub-ranges and higher concentration of your liquidity.
Key Benefits of DLMMs
– Zero Slippage when trading within a bin’s range
– Allows further concentration of liquidity at various price points
– Dynamic fees to capitalise on volatility and volume
– Lends itself to new strategies for liquidity providers
For a detailed exploration of how Meteora employs this concept and the strategies available to users, refer to this article.